An S Corp’s profits pass through to shareholders as unearned income or dividends.  In effect, this shelters these earnings from payroll taxes, and also doesn’t interfere with an older shareholder who is drawing social security.  But if a shareholder provides services for the S Corp the IRS says he or she must draw a reasonable salary.  The question is “what is reasonable?’

 In 2008, the IRS listed factors they would use in this determination, which include training and experience, time and effort devoted to the business, payments to non-shareholder employees, and what similar businesses pay for comparable services.  In 2009, the GAO reported on employment tax noncompliance among S Corp shareholders.  Now the IRS is pursuing this area and is beginning to take cases to court. 

 S Corp shareholders will need to take a good look at what they are paying themselves in salaries.  Good research, and a record of the reasoning behind salary decisions, will go a long way if those salaries are ever questioned.

The IRS looks at three areas:  behavioral control, financial control, and the relationship of the parties.

Behavioral control deals with whether the business has the right to direct and control the worker.  You don’t actually have to do it, you just have to have the right to do it.  So if you dictate when, where or how a worker performs a job, what tools are used or where supplies are purchased, that worker would be deemed an employee.

Financial control deals with the financial situation of the worker.  If the worker has a substantial investment in the project, if he is not reimbursed for some or all expenses, and can realize a profit or incur a loss, then he is probably a contractor and not an employee.

Relationship of the parties is more a “facts and circumstances” issue.  Is there a written contract?  If so, it could bear weight in determining contractor status.  If the worker receives benefits, then he is almost certainly an employee.

Just a few things to think about if you are currently paying contractors.  Give us a call if you need to go in depth on this issue.

 From my perspective, things seem to be looking up.  Most of the people I’ve talked to are hopeful for a prosperous summer season.  Guarded optimism is the general mood of the business community.  Everybody is working hard and gearing up for the crowds.  A lot of businesses are opening their doors for the first time.  Others are sprucing up storefronts, printing new menus and using innovative merchandising techniques to give their business a new presence.  To all I extend my hopes for prosperity and success.  Let me know if we can help you in any way.  Our success depends on the success of our clients.  Good luck to all, and Happy Tourist Season!

 Now for the first time ever, the IRS is also offering a six-month extension for payment.  This extension will eliminate the late payment penalty as long as the tax is paid by October 15, 2012. Anyone who has been unemployed for 30 or more days during 2011, or who is self-employed and has experienced a 25% or more decrease in business income could qualify.  You must not make more than $200,000 ($100,000 if single) or owe more than $50,000.

 There is a new form, of course.  Form 1127-A is used to apply for the extension to pay, which must be filed in addition to filing form 4868 to request an extension for filing.  If you need help or advice with these matters, give us a call.

You can check whether an organization is eligible to receive tax-deductible contributions, and whether those contributions are subject to the 50% or 30% limitation.  You can also check to see if their charitable status has been revoked, or if they have filed the e-postcard form for their annual 990.

So if you are asked to give to an organization that you’re not quite sure of, take the time to check them out first.  When tax filing time comes around next year, you may be glad you did.

You may have noticed it in the upper right corner of our website.  The portal allows us to safely upload and download files with our clients through a secure internet platform.  This is much safer than emailing copies of sensitive information.

If you would like to use the portal to send us information, just drop us an email or give us a call.  We will set up your portal and provide you with a unique password to access it.  Once there, you can change the password to anything you like.  Then you can upload documents from your computer to the portal, and we will pick them up on our end.  Saves you time, and keeps your information secure!

 We’ve heard a lot about “sunset” legislation.  It refers to tax law that was adopted with an expiration date.   A lot of the current tax legislation that applies to individual taxes is schedule to expire, or sunset, after 2012.  The biggest impact will be felt in the area of capital gains.  For 2012, the maximum tax on capital gains is 15%; its zero if you are in a 15% or lower tax bracket.  After 2012, the 15% increases to 20% and the zero rates go away completely. 

 With the state of our economy, I’m not betting on Congress to keep these favorable rates in place.  However, it is an election year, so anything can happen.  But you might want to keep the sunset in mind as you plan for the rest of the year.

The first part of the equation is the amount of the loss.  It’s not necessarily what you had to spend to bring your property back to a pre-storm state.  The IRS deems the loss to be the lesser of the property’s cost basis, or its fair market value.  For example, if you lost two heating & air units (like I did) that cost $10,000 to replace; the replacement cost is not your loss.  The loss is the lower of what you paid for the units originally and what they were worth the day before the storm.  So if you paid $6,000 8 years ago, and you could resell them for $3,000, then the $3,000 is the amount of the loss for tax purposes.

It gets worse.  Once you have determined the amount of the loss, you subtract any insurance proceeds you received.  If there is still a loss, then only the part of the loss that exceeds 10% of your adjusted gross income is actually deductible.  So in our example, if you received a $1,500 insurance payment, then there is only $1,500 of deductible loss left.  If you have adjusted gross income of more than $15,000, then none of the loss is deductible.

WHAT ARE ESTIMATED TAX PAYMENTS?

Estimated tax payments are amounts you pay in each quarter in order to cover the tax you think you will owe for that year.  Basically, tax law requires you to pay taxes as you earn money.  If you are a salaried employee, taxes are withheld from your paycheck and remitted to the taxing authorities.  However, if you are self-employed, or have other sources of investment income, no taxes are withheld during the year.  So you are required to pay the tax in quarterly installments on April 15^th, June 15^th, September 15^th and January 15^th.  You should estimate these amounts when you file your previous year’s return.

IS MY CAR DEDUCTIBLE?

The use of your personal vehicle in the course of a trade or business, or for medical or charitable purposes, may lead to a deduction.  Generally, the deduction consists of multiplying the number o f business miles by a rate set by the IRS each year.  For 2011, that rate was $0.51 for the first half of the year and $0.555 for the last half of the year.  The deduction for medical miles is computed at $0.19 through June 30, 2011, and at $0.235 for the remainder of the year.  For charitable use of your personal vehicle, the deduction is computed at the rate of $0.14 per mile.  

SHOULD I ITEMIZE?

The answer depends on your filing status and the amount of deductible expenses you have incurred.  The IRS offers a standard deduction of $5,950 for single and married separate filers, and $11,900 for married joint or head of household filers.  Unless your deductions exceed these amounts, there is no benefit in itemizing.  Mortgage interest is usually the largest deduction, so if you don’t have that, you probably will not itemize.  Also deductible are property taxes, charitable contributions and some medical expenses (you need enough medical expenses to exceed 7.5% of your adjusted gross income before any of them are deductible).